CHAPTER 3 Research for policy development: Industrial clusters in South China1 Rigas Arvanitis and Qiu Haixiong Abstract This research study analyses the development of industrial clusters in three institutional contexts in South China to better understand how policies have been developed and implemented to encourage innovation. The authors trace the growth of private enterprises within these clusters, and note that this growth was assisted by local governments and by links with foreign companies, which were instrumental in upgrading networks of suppliers and bringing in foreign expertise. The research shows that innovation centres have begun to create networks of enterprises, improve innovation capacities, and enhance communication with universities and research centres. In some districts, local government policy has promoted innovation centres, especially during diffi cult economic times, when a need for better quality and higher priced products made sense in China. As such, the innovation centres were mainly oriented toward servicing the local industry, rather than maintaining a competitive edge. The research team concludes that ‘marketized’ research centres have a greater probability of success than innovation centres because they base decisions on selling products. Since 1999, China has actively promoted innovation policy to reinforce the technological capabilities of smaller fi rms, while continuing to promote larger multinational fi rms. At the same time, public research centres have undergone rapid ‘marketization’,2 which has transformed many former public engineering research centres into enterprises. It is much too early to assess this strategy, but the speed with which private fi rms and collective enterprises have acquired, adapted and promoted new products, and new productive processes, is remarkable. Moreover, the information technology (IT) sector has grown at an unexpectedly rapid rate, and has become the main sector for investment and technological development. This project used empirical evidence to describe the links between scientists and non-scientifi c clients in different institutional contexts in Guangdong Province. It had three objectives: • to investigate the innovation system for research and development (R&D) in the South of China; 40 FUELLING ECONOMIC GROWTH • to understand the dynamics of the relationships between research units and the non-research technological users in different social, economic, and institutional contexts (content of the links, motives, resources, and incentives); and • to promote the creation of a pool of excellence on science and technology policy by providing an empirical basis to policymakers. The institutions that were studied were located in three different institutional settings: Zhongshan University (City of Guangzhou); the industrial districts of Xiqiao (City of Nanhai) and Dachong (Zhongshan City); and a large industrial district producing motorcycles in Pengjiang (City of Jiangmen). Also, an industrial cluster that had no innovation centre (in Dongguan), but an important industrial base, was studied (Table 3.1). Methodology The Research Institute for Guangdong Development (ZURIGuD) of Zhongshan University studies social and economic problems in Guangdong. Local authorities see technological development and innovation as important and have expressed the need for new policies. To support policy development, research was required on the dynamics of industrial and technological development inside fi rms, and on the role of R&D and innovation in Guangdong. Field research for a small project in the industrial cluster of Shuikou, Kaiping, which specializes in the plumbing industry, was conducted in Table 3.1 The three institutional settings that include the industrial clusters and the university that were studied Setting Example Context Activity Technology or Xiqiao (Nanhai) Local industry The centres provide service ‘innovation centre’ textiles innovation to local companies, mainly focused on local centre; Dachong SMEs. Some centres also industry (Zhongshan) furniture provide patterns for new innovation centre products (e.g. moulds and patterns for textiles). R&D unit servicing Pengjiang (Jiangmen) National and Provide designs requested productive units of motorcycle R&D global by production units, or in an industrial group centre industrial response to demand. corporation University Zhongshan University National Research collaboration and undertaking (Guangzhou) research system support for activities with research and and its local high knowledge content linked to implementation (e.g. environmental production units monitoring). Also, common research laboratories with world-class companies. INDUSTRIAL CLUSTERS IN SOUTH CHINA 41 January 2000 and March 2001. This was followed by research on the dynamics of the industrial clusters and the links among knowledge providers in the South of China. This research project was a complement to on going research by ZURIGuD on industrial clusters.3 The ZURIGuD team focused on the roles of innovation centres, intermediate organizations (such as local associations of industrial fi rms), and enterprises in the industrial cluster. This project was designed to use qualitative analysis, a type of research relatively new to our team, and to include the active participation of students. Specifi c interview guides were designed to gather information on: origins and evolution of the innovation centres or institutions; sources of funding and the management of resources; fl ows of knowledge from academic institutions; relationships with enterprises; and incentives. The students participated in the fi eldwork, and in some cases, stayed quite a long time in the industrial districts to gain a better understanding of the situation. As the project progressed, more importance was given to the role of industrial clusters in the Guangdong region and the newly created ‘innovation centres’, because they were becoming sites of technological development. Project staff also participated in debates on how to modify the structure of the innovation centres and refurbish their policy tools. Cooperation as advisors to local authorities has been quite successful, and the local government of the Municipality of Nanhai, as well as the Province of Guangdong, provided partial support to our activities and access to the innovation centres. This exceptional situation allowed our research to focus on the role, context, and future of these innovation centres. Guangdong: A region developed in successive steps The development of Guangdong, and all China for that matter, is the result of successive steps to build a new economic environment. Guangdong received three successive waves of investment.4 The fi rst phase of expansion industrialized the countryside because initial reforms were aimed at that sector. The ability to grow and sell products outside the state planning system led to a rapid rise in agricultural production. In the early 1980s, profi ts from the sale of agricultural produce were massively invested in rural enterprises, the so- called ‘township and village enterprises’ (xiangzhen qiye). This growth lasted 6 years (1983–88). The investments were a boon for the local authorities and the most adept rural inhabitants. They found themselves in quite exceptional circumstances, given the absence of any competition and the existence of a large unsatisfi ed demand. This new economic opportunity permitted the development of an ‘economy out of the plan’ (Naughton, 1995). The early 1990s saw the arrival of ‘foreign’ investments, mostly from Taiwan, Hong Kong, and overseas Chinese. In 1994, foreign direct investment (FDI) represented 20% of overall investment. In 2001, foreign investment from Hong Kong, Macao, and Taiwan continued to represent 18% of total investments (CNY158 bn)5 and 47.5% of foreign investments (CNY55 bn) in 42 FUELLING ECONOMIC GROWTH Guangdong Province. During this phase, two-thirds of the foreign investments were in the hands of small- and medium-sized fi rms from Hong Kong and Taiwan. These fi rms used labour-intensive production to assemble imported parts that they exported to international markets. This system received the blessing of local offi cials because it provided them with great decision-making powers. These fi rms did not represent direct competition to either the China- based township and village enterprises or private- or state-owned enterprises. However, they improved the trade balance and increased employment and incomes. Moreover, demands from the poorly paid labour force were directed to the low-quality products of the communal- and the state-owned enterprises. These enterprises continue to profi t from growth in domestic demand. It also explains why these enterprises survived despite producing goods that were in many ways outdated. The Asian crisis of 1997 led to reduced orders being placed with Chinese enterprises, and slowed (relatively) this form of FDI. The third phase of development began with the arrival of FDI from industrialized countries (e.g. the United States, Japan, and Europe). The Chinese government reacted extremely quickly and adopted a range of measures to attract this foreign investment. The huge campaign in favour of entry into the World Trade Organization (WTO) became the main objective of offi cial policy. Since 1997, investment in real estate has increased rapidly, and large cities have become showcases of China’s growth. Events, such as the Beijing Olympic Games in 2008 and the Shanghai Universal Exhibition in 2010, provide